Exhibit 13

Report of Financials

INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES

Management Discussion
Overview		18
Forward-Looking and Cautionary Statements		18
Management Discussion Snapshot		19
Description of Business		20
Year in Review		25
Prior Year in Review		40
Discontinued Operations		47
Other Information		47
Looking Forward		47
Liquidity and Capital Resources		49
Critical Accounting Estimates		52
Currency Rate Fluctuations		54
Market Risk		55
Financing Risks		56
Employees and Related Workforce		56
Global Financing		57
REPORT OF MANAGEMENT		62
REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM		63
Consolidated Financial Statements
Earnings		64
Financial Position		65
Cash Flows		66
Changes in Equity		67
Notes to Consolidated Financial Statements
A	Significant Accounting Policies	70
B	Accounting Changes	79
C	Acquisitions/Divestitures	82
D	Fair Value	86
E	Financial Instruments (Excluding Derivatives)	87
F	Inventories	88
G	Financing Receivables	88
H	Plant, Rental Machines and Other Property	89
I	Investments and Sundry Assets	89
J	Intangible Assets Including Goodwill	89
K	Borrowings	90
L	Derivatives and Hedging Transactions	92
M	Other Liabilities	97
N	Equity Activity	98
O	Contingencies and Commitments	99
P	Taxes	101
Q	Research, Development and Engineering	103
R	Earnings Per Share of Common Stock	104
S	Rental Expense and Lease Commitments	104
T	Stock-Based Compensation	105
U	Retirement-Related Benefits	109
V	Segment Information	122
W	Subsequent Events	126
FIVE-YEAR COMPARISON OF SELECTED FINANCIAL DATA		127
SELECTED QUARTERLY DATA		128
PERFORMANCE GRAPHS		129
BOARD OF DIRECTORS AND SENIOR LEADERSHIP		131
STOCKHOLDER INFORMATION		132

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Management Discussion

INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES

Overview

The financial section of the International Business Machines Corporation (IBM or the company) 2009 Annual Report includes the Management Discussion, the Consolidated Financial Statements and the Notes to the Consolidated Financial Statements. This Overview is designed to provide the reader with some perspective regarding the information contained in the financial section.

Organization of Information

·The Management Discussion is designed to provide readers with an overview of the business and a narrative on the company’s financial results and certain factors that may affect its future prospects from the perspective of the company’s management. The “Management Discussion Snapshot” on pages 19 and 20 presents an overview of the key performance drivers in 2009.

·Beginning with the “Year in Review” on page 25, the Management Discussion contains the results of operations for each reportable segment of the business and a discussion of the company’s financial position and cash flows. Other key sections within the Management Discussion include: “Looking Forward” on pages 47 to 49 and “Liquidity and Capital Resources” on pages 49 to 52. It is useful to read the Management Discussion in conjunction with note V, “Segment Information,” on pages 122 to 126.

·Global Financing is a reportable segment that is measured as if it were a standalone entity. A separate “Global Financing” section is included beginning on page 57. The information presented in this section is consistent with this separate company view.

·The Consolidated Financial Statements are presented on pages 64 through 69. These statements provide an overview of the company’s income and cash flow performance and its financial position.

·The notes follow the Consolidated Financial statements. Among other items, the notes contain the company’s accounting policies (pages 70 to 79), acquisitions and divestitures (pages 82 to 86), detailed information on specific items within the financial statements, certain contingencies and commitments (pages 99 to 101), and retirement-related benefits information (pages 109 through 121).

·The references to “adjusted for currency” or “at constant currency” in the Management Discussion are made so that certain financial results can be viewed without the impact of fluctuations in foreign currency exchange rates, thereby facilitating period-to-period comparisons of business performance. Financial results adjusted for currency are calculated by translating current period activity in local currency using the comparable prior year period’s currency conversion rate. This approach is used for all countries where the functional currency is the local country currency. See “Currency Rate Fluctuations” on page 54 for additional information.

·Within the financial tables in this Annual Report, certain columns and rows may not add due to the use of rounded numbers for disclosure purposes. Percentages reported are calculated from the underlying whole-dollar numbers.

Discontinued Operations

On December 31, 2002, the company sold its hard disk drive (HDD) business to Hitachi, Ltd. (Hitachi). The HDD business was accounted for as a discontinued operation under generally accepted accounting principles in the United States (GAAP) and therefore, the HDD results of operations and cash flows have been removed from the company’s results of continuing operations and cash flows for the year 2007. There was no activity in 2008 or 2009. See page 47 for additional information.

Forward-Looking and Cautionary Statements

Certain statements contained in this Annual Report may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These Statements involve a number of risks, uncertainties and other factors that could cause actual results to be materially different, as discussed more fully elsewhere in this Annual Report and in the company’s filings with the Securities and Exchange Commission (SEC), including the company’s 2009 Form 10-K filed on February 23, 2010.

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Management Discussion Snapshot

($ and shares in millions except per share amounts)

							Yr.-to-Yr.
							Percent/
							Margin
For the year ended December 31:	2009			2008			Change
Revenue	$	95,758		$	103,630		(7.6	)%*
Gross profit margin	45.7		%	44.1		%	1.7	pts.
Total expense and other income	$	25,647		$	28,945		(11.4	)%
Total expense and other income-to-revenue ratio	26.8		%	27.9		%	(1.1	) pts.
Income before income taxes	$	18,138		$	16,715		8.5	%
Provision for income taxes	4,713			4,381			7.6	%
Net income	$	13,425		$	12,334		8.8	%
Net income margin	14.0		%	11.9		%	2.1	pts.
Earnings per share of common stock:
Assuming dilution	$	10.01		$	8.89	+	12.6	%
Weighted-average shares outstanding:
Assuming dilution	1,341.4			1,387.8		+	(3.3	)%
Assets**	$	109,022		$	109,524		(0.5	)%
Liabilities**	$	86,267		$	95,939	++	(10.1	)%
Equity**	$	22,755		$	13,584	++	67.5	%

*(5.3) percent adjusted for currency.

**At December 31.

+ Reflects the adoption of the Financial Accounting Standards Board (FASB) guidance in determining whether instruments granted in share-based payment transactions are participating securities. See note B, “Accounting Changes,” on pages 79 to 82 for additional information.

++Reflects the adoption of the FASB guidance on noncontrolling interests in consolidated financial statements. See note B, “Accounting Changes,” on pages 79 to 82 for additional information.

In 2009, in a difficult global economic environment, the company continued to deliver value to its clients and strong financial results to its investors-with profit growth driven by continued margin expansion, expense productivity, market share gains in software and systems and a continuing strong cash position. The company again achieved record levels of pre-tax profit, earnings per share and cash flow from operations-despite a decline in revenue. The financial performance reflected the strength of the company’s global model and the results of the strategic transformation of the business.

The company’s transformation, which started at the beginning of the decade, is driven by a combination of shifting the business mix, improving operating leverage through productivity and investing to capture growth opportunities.

The company has exited commoditizing businesses and remixed its portfolio to higher value areas through organic investments and acquisitions. This shift to higher value areas drives a more profitable mix and enables the company to better meet clients’ needs. In addition, the focus on global integration has improved productivity and efficiency. The company’s ongoing initiatives have reduced the fixed cost base and improved the operational balance point-generating more profit for each dollar of revenue. The strong profit and cash base has enabled the company to make significant investments for growth and return capital to shareholders. Key areas of investment include smarter planet solutions, business analytics, growth market opportunities and new computing models such as cloud computing. The strategic transformation of the company has enabled the company to deliver strong financial performance since the last recession in 2002, including the difficult environment in 2008 and 2009, and has positioned the business for the future.

For the year, the company delivered $10.01 in diluted earnings per share, an increase of 12.6 percent year to year. This was the seventh consecutive year of double-digit earnings per share growth. In 2007, the company developed a road map for growth with an earnings per share objective for 2010 of $10 to $11 per share. With its performance in 2009, the company achieved this objective one year early.

Total revenue decreased 7.6 percent (5 percent adjusted for currency) compared to 2008. Revenue from the growth markets declined 3.5 percent, but increased 1 percent at constant currency. Performance was led by the BRIC countries of Brazil, Russia, India and China which increased 4 percent, adjusted for currency. Segment performance was driven by Software which decreased 3.1 percent year to year (1 percent adjusted for currency) and Global Technology Services which declined 4.9 percent (2 percent adjusted for currency). Within Software performance was led by key branded middleware which increased revenue 1.1 percent (3 percent adjusted for currency) compared to the prior year.

Gross profit margins improved reflecting the shift to higher value businesses and the continued focus on productivity and cost management. The consolidated gross profit margin increased 1.7 points versus 2008 to 45.7 percent. This was the sixth consecutive year of improvement in the gross profit margin. Gross profit margin performance by segment and the impact to the consolidated gross margin was as follows:

	Gross		Yr.-to-Yr.		Consolidated
	Margin		Change		Impact
Global Technology Services	35.0	%	2.4	pts.	0.8	pts.
Global Business Services	28.2	%	1.5	pts.	0.4	pts.
Software	86.0	%	0.6	pts.	0.6	pts.
Systems & Technology	37.8	%	(0.2	) pts.	0.1	pts.
Global Financing	47.5	%	(3.8	) pts.	(0.1	) pts.

Total expense and other income decreased 11.4 percent in 2009 versus 2008. The year-to-year drivers were approximately:

·Operational expense, (9) points

·Currency, (4) points

·Acquisitions, 1 point

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Pre-tax income grew 8.5 percent and the pre-tax margin was 18.9 percent, the highest level in more than a decade. Net income increased 8.8 percent reflecting a slight improvement in the tax rate. The effective tax rate for 2009 was 26.0 percent, compared with 26.2 percent in 2008.

Diluted earnings per share improved 12.6 percent reflecting the strong growth in net income and the benefits of the common stock repurchase program. In 2009, the company repurchased approximately 69 million shares of its common stock. Diluted earnings per share of $10.01 increased $1.12 from the prior year driven by the following factors:

·	Revenue decrease at actual rates:	$	(0.68	)
·	Gross margin increase of 1.7 points:	$	0.85
·	Expense productivity:	$	0.58
·	Tax rate decrease of 0.2 points:	$	0.03
·	Common stock repurchases:	$	0.34

At December 31, 2009, the Company’s balance sheet and liquidity positions remained strong. Cash on hand was $12,183 million. Total debt decreased $7,826 million year to year, and the company generated $20,773 million in operating cash flow in 2009. The company has consistently generated strong cash flow from operations and also continues to have access to additional sources of liquidity through the capital markets and its global credit facility.

Key drivers in the company’s balance sheet and total cash flows are highlighted below.

Total assets decreased $502 million (decreased $3,885 million adjusted for currency) from December 31, 2008, driven by:

·Decreases in cash and cash equivalents ($558 million) and total receivables ($1,301 million); and

·Lower deferred taxes ($2,888 million) and intangible assets ($365 million), partially offset by;

·Increased goodwill ($1,964 million) and prepaid pension assets ($1,401 million); and

·Higher level of marketable securities ($1,625 million).

The company had $13,973 million in cash and marketable securities at December 31, 2009.

Total liabilities decreased $9,672 million (decreased $11,213 million adjusted for currency) from December 31, 2008 driven by:

·Lower total debt ($7,826 million);

·Decrease in retirement-related benefit obligations ($3,500 million), partially offset by;

·Higher tax liabilities ($1,083 million); and

·Increased deferred income ($997 million).

Total equity of $22,755 million increased $9,170 million from the prior year-end balance as a result of:

·Higher retained earnings ($10,546 million);

·Increase in foreign currency translation adjustments ($1,732 million);

·Increase in retirement-related items ($1,727 million) and common stock ($2,682 million), partially offset by;

·Increased treasury stock ($7,072 million); and

·Increased net unrealized losses on cash flow derivatives ($556 million).

The company generated $20,773 million in cash flow provided by operating activities, an increase of $1,961 million, compared to 2008, primarily driven by a decrease in receivables ($1,857 million). Net cash used in investing activities of $6,729 million was $2,556 million lower than 2008, primarily due to the prior year Cognos acquisition and the core logistics operations divestiture in 2009, partially offset by the year-to-year impacts related to marketable securities and other investments.

Net cash used in financing activities of $14,700 million was $2,866 million higher, primarily due to debt repayments ($5,019 million), partially offset by lower common stock repurchases ($3,150 million) in 2009 versus 2008.

Total Global Services signings were $57,094 million, flat (up 2 percent adjusted for currency) versus 2008. The estimated Global Services backlog was $137 billion at December 31, 2009, up $7 billion ($1 billion adjusted for currency) versus the prior year-end balance.

In January 2010, the company disclosed that it is expecting earnings of at least $11.00 per diluted share for the full year 2010.

For additional information and details, see the “Year in Review” section on pages 25 through 39.

Description of Business

Please refer to IBM’s Annual Report on Form 10-K filed with the SEC on February 23, 2010 for a more detailed version of this Description of Business, especially Item 1A. entitled “Risk Factors.”

The company creates business value for clients and solves business problems through integrated solutions that leverage information technology and deep knowledge of business processes. IBM solutions typically create value by reducing a client’s operational costs or by enabling new capabilities that generate revenue. These solutions draw from an industry leading portfolio of consulting, delivery and implementation services, enterprise software, systems and financing.

Strategy

Despite the volatility of the information technology (IT) industry over the past decade, IBM has consistently delivered superior performance, with a steady track record of sustained earnings per share growth. The company has shifted its business mix, exiting commoditized segments while increasing its presence in higher-value areas such as services, software and integrated solutions. As part of this shift, the company has acquired over 100 companies this past decade, complementing and scaling its portfolio of products and offerings.

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IBM’s clear strategy has enabled steady results in core business areas, while expanding its offerings and addressable markets. The key tenets of this strategy are:

·Deliver value to enterprise clients through integrated business and IT innovation

·Build/expand strong positions in growth initiatives

·Shift the business mix to higher-value software and services

·Become the premier globally integrated enterprise

These priorities reflect a broad shift in client spending away from “point products” and toward integrated solutions, as companies seek higher levels of business value from their IT investments. IBM has been able to deliver this enhanced client value thanks to its industry expertise, understanding of clients’ businesses and the breadth and depth of the company’s capabilities.

IBM’s growth initiatives, like its strengthened capabilities, align with these client priorities. These initiatives include Smarter Planet and Industry Frameworks, Growth Markets, Business Analytics and Cloud Computing. Each initiative represents a significant growth opportunity with attractive profit margins for IBM.

Smarter Planet and Industry Frameworks

Smarter Planet is an overarching strategy that highlights IBM’s differentiated capabilities and generates broad-based demand for the company’s products and services. Smarter Planet encapsulates IBM’s view of enterprise IT’s next major revolution: the instrumentation and integration of the world’s processes and infrastructures-from energy grids and pipelines to supply chains and traffic systems. The massive amount of data these systems are generating can now be captured and analyzed. This infusion of intelligence enables more efficiency, productivity and responsiveness.

Clients seeking these “smart” solutions value IBM’s deep industry and process expertise, powerful back-end systems and data analytics, complex systems integration capability and unique research capacity.

IBM’s Industry Frameworks create a flexible software foundation for developing, acquiring and deploying smart industry solutions. Each framework supports multiple solutions, enabling fast, efficient and tailored capabilities in support of clients’ business needs. These frameworks represent a proven technique for the company to engage with its clients, driving sustained growth and high business value. They cover a wide variety of industries and domains, most of which are directly tied to Smarter Planet.

Growth Markets

The company has benefited from its investments over the past several years in growth markets. The focus now is on geographic expansion of IBM’s presence; on specific industry verticals of the highest impact and opportunity; on countries’ build-out of infrastructure aligned with their national agendas; and on creating markets and new business models to serve the different requirements that exist in these emerging countries.

In order to support this growth, IBM is continuing to invest significantly in these markets to expand capacity and develop talent. At the same time, IBM is expanding and benefiting from large teams of talent with global missions of delivery. The company continues to deepen its research and development (R&D) teams to design for the unique challenges and rapid growth facing these markets.

Business Analytics and Optimization

Business optimization through the application of advanced analytics is emerging as another major category of business value. It succeeds earlier generations of back-office automation, basic enterprise resource planning and traditional business intelligence. Advanced analytics allow clients to see patterns in data they could not see before, understand their exposure to risk and predict the outcomes of business decisions with greater certainty.

IBM’s approach is end-to-end, providing cross-enterprise as well as industry-based analytics solutions. IBM has established the Business Analytics and Optimization practice, leveraging IBM consulting capabilities and software products, along with systems and research assets. IBM’s breadth of expertise uniquely positions the company for revenue and profit growth.

Cloud Computing

“Cloud” is an emerging consumption and delivery model for many IT-related services. Clients are attracted to its improved economics, flexibility and user experience. Traditional enterprise IT will increasingly integrate with these new cloud deployments, delivered as services via the Internet (also known as public clouds) or behind a firewall (private clouds). In discussions with enterprise clients, most are initially focused on private cloud implementations, the middle ground between the traditional enterprise IT and public clouds.

IBM is helping clients determine how to leverage cloud computing to achieve business advantage. The company provides a full set of capabilities, from support in designing and implementing cloud solutions, to services for running and managing them if desired. IBM is applying its deep experience in critical areas such as security, reliability and innovation to deliver differentiated value. The company is also investing in new cloud initiatives tailored to particular industries, in conjunction with its partners and clients, to deliver cloud business services directly to the market. By providing deployment choice, optimizing solutions based on workload characteristics and delivering complete service management capabilities, IBM is positioned as the leading cloud service and infrastructure provider for enterprises.

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Business Model

The company’s business model is built to support two principal goals: helping clients succeed in delivering business value by becoming more innovative, efficient and competitive through the use of business insight and IT solutions; and providing long-term value to shareholders. The business model has been developed over time through strategic investments in capabilities and technologies that have the best long-term growth and profitability prospects based on the value they deliver to clients.

The company’s global capabilities include services, software, systems, fundamental research and related financing. The broad mix of businesses and capabilities are combined to provide business insight and solutions for the company’s clients.

The business model is flexible, adapting to the continuously changing market and economic environment. the company continues to divest commoditizing businesses and strengthen its position through strategic investments and acquisitions in higher value segments like business analytics, smarter planet and cloud computing. In addition, the company has transformed itself into a globally integrated enterprise which has improved overall productivity and is driving investment and participation in the world’s fastest growing markets. As a result, the company is a higher performing enterprise today than it was several years ago.

The business model, supported by the company’s long-term financial model, has enabled the company to deliver consistently strong earnings, cash flows and returns to shareholders in changing economic environments.

Business Segments and Capabilities

The company’s major operations comprise: a Global Technology Services segment; a Global Business Services segment; a Software segment; a Systems and Technology segment; and a Global Financing segment.

Global Services is a critical component of the company’s strategy of providing IT infrastructure and business insight and solutions to clients. While solutions often include industry-leading IBM software and systems, other suppliers’ products are also used if a client solution requires it. approximately 60 percent of external Global Services segment revenue is annuity-based, coming primarily from outsourcing, maintenance and custom application management services arrangements. The Global Services backlog provides a solid revenue base entering each year. Within Global Services, there are two reportable segments: Global Technology Services and Global Business Services.

Global Technology Services (GTS) primarily provides IT infrastructure services and business process services, delivering business value through the company’s global scale, standardization and automation.

GTS CAPABILITIES

Strategic Outsourcing Services. Comprehensive IT outsourcing services dedicated to transforming clients’ existing infrastructures to ensure better quality, cost control, adaptability, security and compliance. IBM integrates long-standing experience in service management, technology and industry applications with new technologies, such as cloud computing and virtualization, to enable new capabilities for clients.

Business Transformation Outsourcing. A range of offerings from standardized processing platforms and Business Process Outsourcing through transformational offerings that deliver improved business results to clients through the strategic change and/or operation of the client’s business processes, applications and infrastructure.

Integrated Technology Services. Project-based portfolio of services that enable clients to optimize their IT environments by driving efficiency, flexibility and productivity, while reducing costs. The standardized portfolio is built around key assets and patented software, and incorporates best practices and proven methodologies that ensure predictive quality of delivery, security and compliance.

Maintenance. A complete line of support services from product maintenance through solution support to maintain and improve the availability of clients’ IT infrastructure.

The GTS outsourcing businesses are supported by integrated worldwide delivery organizations:

Integrated Technology Delivery (ITD) is responsible for worldwide service delivery supporting the Strategic Outsourcing business. It manages the world’s largest privately-owned IT infrastructure with employees in over 40 countries, supporting over 450 data centers. Itd operates a globally integrated delivery model which supports regional client-facing teams by utilizing a global network of competencies and centers. each competency provides industry-leading, standardized, integrated tools and processes. By leveraging IBM’s global scale, skills and technology which is combined with the innovation from IBM research, clients gain access to leading edge, high-quality services with improved productivity, flexibility and cost.

Business Process Delivery (BPD) provides highly efficient, world-class delivery capabilities in IBM’s business process delivery operations, which include Business transformation Outsourcing, Business process Outsourcing and Business process services. Bpd has employees and delivery centers in over 40 countries worldwide.

Global Business Services (GBS) primarily provides professional services and application outsourcing services, delivering business value and innovation to clients through solutions which leverage industry- and business-process expertise.

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GBS CAPABILITIES

Consulting and Systems Integration. Delivery of value to clients through consulting services for client-relationship management, financial management, human-capital management, business strategy and change, and supply-chain management. In 2009, the company announced the creation of a new consulting service line dedicated to the market for advanced business analytics and business optimization.

Application Management Services. Application development, management, maintenance and support services for packaged software, as well as custom and legacy applications. Value is delivered through the company’s global resource capabilities, industry knowledge and the standardization and automation of application development.

Software consists primarily of middleware and operating systems software. Middleware software enables clients to integrate systems, processes and applications across a standard software platform. IBM middleware is designed on open standards, making it easier to integrate disparate business applications, developed by different methods and implemented at different times. operating systems are the software engines that run computers. Approximately two-thirds of external software segment revenue is annuity-based, coming from recurring license charges and ongoing subscription and support from one-time charge (OTC) arrangements. The remaining one-third relates to OTC arrangements in which clients pay one, up-front payment for a perpetual license. Typically, arrangements for the sale of OTC software include one year of subscription and support. clients can also purchase ongoing subscription and support after the first year, which includes product upgrades and technical support.

SOFTWARE CAPABILITIES

WebSphere Software. delivers capabilities that enable clients to integrate and manage business processes across their organizations with the flexibility and agility they need to respond to changing conditions quickly. With a services-oriented architecture (SOA), businesses can more easily link together their fragmented data and business processes to extract value from their existing technology.

Information Management Software. enables clients to integrate, manage and use their information to gain business value and improve their outcomes. Solutions include advanced database management, enterprise content management, information integration, data warehousing, business analytics and intelligence, performance management and predictive analytics.

Tivoli Software. Helps clients manage their technology and business assets by providing visibility, control and automation across their organizations. With solutions for identity management, data security, storage management and the ability to provide automation and provisioning of the datacenter, Tivoli helps build the infrastructure needed to make the world’s systems—from transportation to water, energy and telecommunications—run smarter.

Lotus Software. Enables businesses to connect people and processes for more effective communication and increased productivity through collaboration, messaging and social networking software. By remaining at the forefront of collaboration tools, Lotus helps organizations reap the benefits of social networking and other Web 2.0 modalities.

Rational Software. supports software development for both It and embedded system solutions with a suite of application lifecycle Management products. Jazz, Rational’s technology platform, transforms the way people work together to build software, making software delivery more collaborative, productive and transparent.

Operating Systems. software that manages the fundamental processes that make computers run.

Systems and Technology provides clients with business solutions requiring advanced computing power and storage capabilities. approximately 55 percent of systems and Technology’s server and storage sales transactions are through the company’s business partners; approximately 45 percent are direct to end-user clients. In addition, systems and technology provides leading semiconductor technology, products and packaging solutions to clients and for IBM’s own advanced technology needs.

SYSTEMS AND TECHNOLOGY CAPABILITIES

Systems. A range of general purpose and integrated systems designed and optimized for specific business, public and scientific computing needs. These systems—system z, converged system p and system x—are typically the core technology in data centers that provide required infrastructure for business and institutions. also, these systems form the foundation for IBM’s integrated offerings, such as IBM Smart Business Storage Cloud, IBM Smart Analytics Cloud, IBM Smart Analytics System and IBM CloudBurst. IBM servers use both IBM and non-IBM microprocessor technology and operating systems. All IBM servers run Linux, a key open-source operating system.

Storage. IBM provides data storage products and solutions that allow clients to retain and manage rapidly growing, complex volumes of digital information. These solutions address critical client requirements for information retention and archiving, data deduplication, availability and virtualization, and security and compliance. The portfolio consists of a broad range of disk and tape storage systems and software, including the next-generation, ultra-scalable disk storage system XIV.

Retail Store Solutions. point-of-sale retail systems (network connected cash registers) as well as solutions which connect them to other store systems.

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Microelectronics. Semiconductor design and manufacturing primarily for use in IBM systems and storage products and for sale to external clients.

Global Financing facilitates clients’ acquisition of IBM systems, software and services. Global Financing invests in financing assets, leverages with debt and manages the associated risks with the objective of generating consistently strong returns on equity. The primary focus on the company’s offerings and clients mitigates many of the risks normally associated with a financing company. Global Financing has the benefit of both a deep knowledge of its client base and a clear insight into the products and services that are being financed. This combination allows Global Financing to effectively manage two of the major risks (credit and residual value) that are normally associated with financing.

GLOBAL FINANCING CAPABILITIES

Client Financing. Lease and loan financing to end users and internal clients for terms generally between two and seven years. Internal financing is predominantly in support of Global Services’ long-term client service contracts. Global Financing also factors a selected portion of the company’s accounts receivable, primarily for cash management purposes. All internal financing arrangements are at arm’s-length rates and are based upon market conditions.

Commercial Financing. Short-term inventory and accounts receivable financing to dealers and remarketers of IT products.

Remarketing. The sale and lease of used equipment to new or existing clients both externally and internally. this equipment is primarily sourced from the conclusion of lease transactions. Externally remarketed equipment revenue represents sales or leases to clients and resellers. Internally remarketed equipment revenue primarily represents used equipment that is sold or leased internally to the systems and Technology and Global services segments. the systems and technology segment may also sell the equipment that it purchases from Global Financing to external clients.

IBM Worldwide Organizations

The following worldwide organizations play key roles in IBM’s delivery of value to its clients:

·Sales and Distribution

·Research, Development and Intellectual Property

·Integrated Supply Chain

Sales and Distribution

IBM has a significant global presence, operating in more than 170 countries, with an increasingly broad-based geographic distribution of revenue. The company’s sales and distribution organization manages a strong global footprint, with dedicated country-based operating units focused on delivering client value. Within these units, client relationship professionals work with integrated teams of consultants, product specialists and delivery fulfillment teams to improve clients’ business performance. These teams deliver value by understanding the clients’ businesses and needs, and then bring together capabilities from across IBM and an extensive network of Business partners to develop and implement solutions.

By combining global expertise with local experience, IBM’s geographic structure enables dedicated management focus for local clients, speed in addressing new market opportunities and timely investments in emerging opportunities. The geographic units align industry-skilled resources to serve clients’ agendas. IBM extends capabilities to mid-market client segments by leveraging industry skills with marketing, ibm.com and local Business partner resources.

In 2008, the company implemented a new growth markets organization to increase its focus on the emerging markets around the world that have market growth rates greater than the global average–countries within Southeast Asia, Eastern Europe, the Middle East and Latin America. The company’s major markets include the United States (U.S.), Canada, the United Kingdom (u.K.), France, Germany, Italy, Japan, Denmark, Sweden, Switzerland, Austria, Belgium, Finland, Greece, Ireland, the Netherlands, Portugal, Cyprus, Norway, Israel, Spain, the Bahamas and the Caribbean region.

The majority of IBM’s revenue, excluding the company’s original equipment manufacturer (OEM) technology business, occurs in industries that are broadly grouped into six sectors:

·Financial Services: Banking, Financial Markets, Insurance

·Public: Education, Government, Healthcare, Life sciences

·Industrial: aerospace and defense, automotive, chemical and petroleum, electronics

·Distribution: consumer products, retail, travel and transportation

·Communications: telecommunications, Media and entertainment, energy and utilities

·General Business: Mainly companies with fewer than 1,000 employees

Research, Development and Intellectual Property

IBM’s R&D operations differentiate the company from its competitors. IBM annually invests approximately $6 billion for R&D, focusing on high-growth, high-value opportunities. As a result of innovations in these and other areas, IBM was once again awarded more U.S. patents in 2009 than any other company, the 17th consecutive year IBM has been the patent leader. IBM’s 4,914 patents in 2009 were the most u.s. patents ever awarded to one company in a single year. Consistent with the shift in the company’s business mix, approximately 70 percent of these patents were software and services. the company will continue to actively seek intellectual property protection for its innovations, while increasing emphasis on other initiatives designed to leverage its intellectual property leadership and promote innovation.

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In addition to producing world-class systems, software and technology products, IBM innovations are also a major differentiator in providing solutions for the company’s clients through its services businesses. The company’s investments in R&D also result in intellectual property (IP) income of approximately $1 billion annually. some of IBM’s technological breakthroughs are used exclusively in IBM products, while others are licensed and may be used in either/both IBM products and/or the products of the licensee. While the company’s various proprietary intellectual property rights are important to its success, IBM believes its business as a whole is not materially dependent on any particular patent or license, or any particular group of patents or licenses. IBM owns or is licensed under a number of patents, which vary in duration, relating to its products. Licenses under patents owned by IBM have been and are being granted to others under reasonable terms and conditions.

Integrated Supply Chain

Consistent with the company’s work with clients to transform their supply chains for greater efficiency and responsiveness to global market conditions, the company continues to derive business value from its own globally integrated supply chain, thereby providing a strategic advantage for the company to create value for clients. IBM leverages its supply-chain expertise for clients through its supply-chain business transformation outsourcing service to optimize and help operate clients’ end-to-end supply-chain processes, from procurement to logistics.

IBM spends approximately $35 billion annually through its supply chain, procuring materials and services globally. The supply, manufacturing and logistics and customer fulfillment operations are integrated in one operating unit that has optimized inventories over time, improved response to marketplace opportunities and external risks and converted fixed costs to variable costs. Simplifying and streamlining internal processes has improved operations, sales force productivity and processes.

Year in Review

Segment Details

The following is an analysis of the 2009 versus 2008 reportable segment results. The analysis of 2008 versus 2007 reportable segment results is on pages 40 to 45.

The following table presents each reportable segment’s external revenue and gross margin results.

($ in millions)

							Yr.-to-Yr.		Yr.-to-Yr.
							Percent/		Change
							Margin		Adjusted
For the year ended December 31:	2009			2008			Change		for Currency
Revenue:
Global Technology Services	$	37,347		$	39,264		(4.9	)%	(2.0	)%
Gross margin	35.0		%	32.6		%	2.4	pts.
Global Business Services	17,653			19,628			(10.1	)%	(8.1	)%
Gross margin	28.2		%	26.7		%	1.5	pts.
Software	21,396			22,089			(3.1	)%	(0.8	)%
Gross margin	86.0		%	85.4		%	0.6	pts.
Systems and Technology	16,190			19,287			(16.1	)%	(14.9	)%
Gross margin	37.8		%	38.1		%	(0.2	) pts.
Global Financing	2,302			2,559			(10.0	)%	(7.3	)%
Gross margin	47.5		%	51.3		%	(3.8	) pts.
Other	869			803			8.3	%	11.7	%
Gross margin	11.6		%	13.4		%	(1.8	) pts.
Total Revenue	$	95,758		$	103,630		(7.6	)%	(5.3	)%
Gross profit	$	43,785		$	45,661		(4.1	)%
Gross margin	45.7		%	44.1		%	1.7	pts.

25

the following table presents each reportable segment’s external revenue as a percentage of total segment external revenue and each reportable segment’s pre-tax income as a percentage of total segment pre-tax income.

	Revenue				Pre-tax Income*
For the year ended December 31:	2009		2008		2009		2008
Global Technology Services	39.4	%	38.2	%	28.6	%	26.3	%
Global Business Services	18.6		19.1		13.2		15.3
Total Global Services	58.0		57.3		41.9		41.6
Software	22.5		21.5		41.9		40.4
Systems and Technology	17.1		18.8		7.3		8.8
Global Financing	2.4		2.5		8.9		9.2
Total	100.0	%	100.0	%	100.0	%	100.0	%

*Segment pre-tax income includes transactions between segments that are intended to reflect an arm’s-length transfer price and excludes certain unallocated corporate items; see note V, “segment Information” for additional information.

In 2009, Global Services and Software increased as a percentage of total segment revenue and total segment pre-tax income, with Global services and software each contributing 42 percent of segment pre-tax income. these changes reflect the company’s continuing transformation and the remix of its business — both aimed at market segments that present the best long-term opportunities.

global services

The Global services segments, Gts and GBs, had combined revenue of $55,000 million, a decrease of 6.6 percent (4 percent adjusted for currency) in 2009 when compared to 2008. services revenue performance was supported by its annuity revenue base, but also reflected the challenges in the more economically sensitive consulting business. 

total Global Services signings of $57,094 million decreased 0.2 percent (increased 2 percent adjusted for currency). outsourcing signings of $33,014 million increased 8.8 percent (11 percent adjusted for currency). outsourcing signings growth was broad based across all the major geographies and in each business area: strategic outsourcing, Business transformation outsourcing and application outsourcing. consulting and systems Integration and Integrated technology services signings were $24,081 million, a decrease of 10.2 percent (8 percent adjusted for currency). the estimated Global Services backlog at actual currency rates was $137 billion at december 31, 2009, an increase of $7 billion ($1 billion adjusted for currency) from december 31, 2008 and an increase of $2 billion ($3 billion adjusted for currency) from september 30, 2009.

the Global Services segments delivered a combined pre-tax profit of $8,092 million in 2009, a growth of 11.0 percent versus 2008, and expanded pre-tax margin 2.3 points to 14.1 percent. the improved margin was a result of the structural changes made to services delivery over the past several years. the services global delivery capabilities have proven to be dynamic and flexible enough to deal with very tough market conditions. overall, the Global Services business delivered strong margin and signings performance in a difficult economic climate.

($ in millions)

							yr.-to-yr.
					yr.-to-yr.		change adjusted
For the year ended December 31:	2009		2008		change		for currency
global services external revenue:	$	55,000	$	58,891	(6.6	)%	(4.0	)%
Global technology Services	$	37,347	$	39,264	(4.9	)%	(2.0	)%
Strategic Outsourcing	19,340		20,183		(4.2	)	(1.5	)
Integrated Technology Services	8,771		9,283		(5.5	)	(2.9	)
Business Transformation Outsourcing	2,280		2,550		(10.6	)	(6.1	)
Maintenance	6,956		7,250		(4.1	)	(1.1	)
Global Business services	$	17,653	$	19,628	(10.1	)%	(8.1	)%

26

Global technology services revenue of $37,347 million decreased 4.9 percent (2 percent adjusted for currency) in 2009 versus 2008. total Gts signings of $34,703 million in 2009 were flat (increased 3 percent adjusted for currency) versus 2008. outsourcing signings of $25,507 million increased 4.3 percent (8 percent adjusted for currency) with growth of 7 percent in the major markets and 14 percent in the growth markets, adjusted for currency. Integrated technology services signings of $9,196 million decreased 10.3 percent (8 percent adjusted for currency). 

strategic outsourcing (SO) revenue decreased 4.2 percent (1 percent adjusted for currency). sO revenue performance, adjusted for currency, was consistent throughout the year, although impacted by reduced volumes in the existing client base. sO signings increased 1.8 percent (6 percent adjusted for currency) when compared to 2008. revenue trends in outsourcing should improve in 2010 as a result of the 2009 signings performance.

Integrated Technology Services (ITS) revenue decreased 5.5 percent (3 percent adjusted for currency) in 2009 versus 2008. revenue performance largelyreflects recent signings performance which continued to be impacted by declines in oeM offerings, as the ITS portfolio shifts to higher value, higher margin offerings.

Business Transformation Outsourcing (Bto) revenue decreased 10.6 percent (6 percent adjusted for currency) year to year and reflects declines in client business volumes in a slower economic environment and an increased focus on deal selectivity. Bto signings increased 21.9 percent (26 percent adjusted for currency) in 2009 compared to 2008.

Global Business Services revenue decreased 10.1 percent (8 percent adjusted for currency) in 2009 driven primarily by a double-digit decline in Consulting and Systems Integration revenue. total signings in GBs decreased 0.4 percent (increased 1 percent adjusted for currency). application Outsourcing signings increased 27.1 percent (25 percent adjusted for currency), illustrating the strong value proposition Application Outsourcing can provide to clients with compelling cost savings. consulting and Systems Integration signings decreased 10.2 percent (8 percent adjusted for currency).

($ in millions)

							Yr.-to-Yr.
For the year ended December 31:	2009			2008			Change
global services:
Global Technology Services:
external gross profit	$	13,081		$	12,802		2.2	%
external gross profit margin	35.0		%	32.6		%	2.4	pts.
pre-tax income	$	5,537		$	4,607		20.2	%
pre-tax margin	14.3		%	11.3		%	3.0	pts.
Global Business Services:
external gross profit	$	4,979		$	5,238		(4.9	)%
external gross profit margin	28.2		%	26.7		%	1.5	pts.
pre-tax income	$	2,555		$	2,681		(4.7	)%
pre-tax margin	13.8		%	13.0		%	0.8	pts.

Gts gross profit margin improved 2.4 points to 35.0 percent in 2009 and expanded in all lines of business when compared to 2008. strategic Outsourcing gross margin improved for the fifth consecutive year, while also improving overall service delivery quality. this has been accomplished through a disciplined and innovative approach to delivery focused on both labor and non-labor productivity actions. Gts has been executing a strategy to deliver services out of key global delivery centers using consistent global delivery methods and processes. the delivery centers are also improving labor utilization with analytics and by applying supply chain tools and techniques to the labor base. Integrated Technology Services gross margin improved as the result of mixing the portfolio of offerings to more profitable labor-based services. Business Transformation Outsourcing gross margin expanded as a result of improved deal selectivity and delivery performance. segment pre-tax profit increased 20.2 percent to $5,537 million with a pre-tax margin of 14.3 percent, an increase of 3.0 points versus 2008.

GBs gross profit margin improved 1.5 points to 28.2 percent in 2009 with an improving margin trend throughout the year. segment pre-tax profit was down 4.7 percent to $2,555 million, however, margin improved 0.8 points year over year. throughout the year, the dynamic GBS delivery model enabled solid profit performance in a tough economic climate. the pre-tax margin expansion also included improving trends throughout the year and was driven primarily by improved delivery center utilization, reduced subcontractor spending and improved cost and expense management.

globAl seRVIces sIgnIngs

the table on page 28 presents Global Services signings as reported. signings at actual currency rates provide investors with a better view of how these signings will convert to services revenue and also provides better comparability to other companies in the industry who report signings using actual rates.

27

($ in millions)

							Yr.-to-Yr.
					Yr.-to-Yr.		Change Adjusted
For the year ended December 31:	2009		2008		Change		for Currency
global technology services signings:
outsourcing	$	25,507	$	24,446	4.3	%	8.1	%
ITS	9,196		10,247		(10.3	)	(8.2	)
total	$	34,703	$	34,693	0.0	%	3.3	%
global business services signings:
Application Outsourcing	$	7,506	$	5,905	27.1	%	25.1	%
Consulting & Systems Integration	14,885		16,584		(10.2	)	(7.9	)
total	$	22,391	$	22,488	(0.4	)%	0.8	%

Global services signings are management’s initial estimate of the revenue value of a client’s commitment under a Global Services contract. signings are used by management to assess period performance of Global Services management. there are no third-party standards or requirements governing the calculation of signings. the calculation used by management involves estimates and judgments to gauge the extent of a client’s commitment, including the type and duration of the agreement, and the presence of termination charges or wind-down costs. 

signings include SO, BTO, ITS and GBS contracts. contract extensions and increases in scope are treated as signings only to the extent of the incremental new revenue value. Maintenance is not included in signings as maintenance contracts tend to be more steady state, where revenues equal renewals.

Backlog includes SO, BTO, ITS, GBS and Maintenance. Backlog is intended to be a statement of overall work under contract and therefore does include Maintenance. Backlog estimates are subject to change and are affected by several factors, including terminations, changes in the scope of contracts, periodic revalidations and adjustments for revenue not materialized.

contract portfolios purchased in an acquisition are treated as positive backlog adjustments provided those contracts meet the company’s requirements for initial signings. a new signing will be recognized if a new services agreement is signed incidental or coincidental to an acquisition or divestiture.

Software

($ in millions)

							Yr.-to-Yr.
							Change
					Yr.-to-Yr.		Adjusted
For the year ended December 31:	2009		2008*		Change		for Currency
Software external revenue:	$	21,396	$	22,089	(3.1	)%	(0.8	)%
Middleware	$	17,125	$	17,305	(1.0	)%	1.4	%
Key Branded Middleware	12,524		12,392		1.1		3.4
WebSphere Family					10.5		12.7
Information Management					(0.5	)	1.9
lotus					(10.0	)	(7.9	)
tivoli					2.9		5.1
rational					0.2		2.7
other middleware	4,602		4,912		(6.3	)	(3.5	)
operating systems	2,163		2,337		(7.4	)	(4.9	)
product Lifecycle Management	739		960		(23.0	)	(21.7	)
other	1,369		1,488		(8.0	)	(5.8	)

*  reclassified to conform with 2009 presentation.

28

software revenue of $21,396 million decreased 3.1 percent (1 percent adjusted for currency) in 2009 compared to 2008. adjusted for currency, growth in the Key Branded Middleware products was offset by decreased revenue in other components of the software portfolio. overall, the software business has continued to perform well in an uncertain environment. the company’s recent acquisitions increased revenue and the company is continuing to invest in capabilities that accelerate the development of new market opportunities like business analytics and smarter planet.

Key Branded Middleware revenue increased 1.1 percent (3 percent adjusted for currency) and represented 59 percent of total Software revenue, an increase of 2 points from 2008. the company continued to solidify its lead in the middleware market, gaining share for nine consecutive quarters. organic investments and acquisitions in middleware capabilities continue to result in it becoming a larger portion of the software portfolio and improving the overall software revenue growth rate. Growth in 2009, adjusted for currency, was led by WebSphere and tivoli. 

WebSphere Family revenue increased 10.5 percent (13 percent adjusted for currency) in 2009 with strong performance throughout the year. application Servers, which provide customers with a secure and resilient infrastructure for mission-critical business applications, grew 5 percent adjusted for currency. Business Integration software had double-digit revenue growth in 2009, including strong contribution from IloG, a company acquired in the fourth quarter of 2008.

Information Management revenue decreased 0.5 percent (increased 2 percent adjusted for currency) in 2009 versus the prior year, with revenue growth, adjusted for currency, in both Information Management solutions and infrastructure offerings. cognos and InfoSphere software, two key components of the business analytics area, both had double-digit revenue growth adjusted for currency. the acquisition of spss, which was completed in early october, 2009, further expands the company’s business analytics capabilities. 

lotus revenue decreased 10.0 percent (8 percent adjusted for currency) in 2009. demand for Lotus software was impacted by customer consolidations and downsizing throughout 2009. 

tivoli revenue increased 2.9 percent (5 percent adjusted for currency) in 2009 when compared to 2008, driven by growthin storage software. tivoli storage revenue grew consistently throughout the year as customers managed their rapidly growing storage data.

rational revenue increased 0.2 percent in 2009 as reported and increased 3 percent adjusted for currency versus 2008. rational’s integrated software tools improve the speed, quality and efficiency for customers with software development projects. telelogic contributed strong revenue growth in 2009 and extended the brand’s reach into the systems development market opportunity. 

revenue from Other middleware products decreased 6.3 percent (3 percent adjusted for currency) in 2009 versus the prior year. this software product set includes more mature products which provide a more stable flow of revenue. 

operating systems product revenue decreased 7.4 percent (5 percent adjusted for currency) in 2009 compared to 2008, reflecting declining sales in all system brands. 

product Lifecycle Management revenue decreased 23.0 percent (22 percent adjusted for currency). the company and Dassault Systemes (ds) signed an agreement in october 2009 under which ds intends to acquire the company’s sales and client support operations encompassing ds’s Product Lifecycle Management software application portfolio, as well as customer contracts and related assets. the company expects to record a gain when this transaction is completed, which is anticipated in the first quarter of 2010.

($ in millions)

							Yr.-to-Yr.
For the year ended December 31:	2009			2008			Change
software:
external gross profit	$	18,405		$	18,859		(2.4	)%
external gross profit margin	86.0		%	85.4		%	0.6	pts.
pre-tax income	$	8,095		$	7,075		14.4	%
pre-tax margin	33.6		%	28.5		%	5.2	pts.

software gross profit of $18,405 million in 2009 decreased 2.4 percent versus 2008, driven primarily by declining revenue. Gross profit margin expanded 0.6 points to 86.0 percent in 2009. the Software segment delivered $8,095 million of pre-tax profit in 2009, an increase of 14.4 percent versus 2008. the segment pre-tax profit margin expanded 5.2 points to 33.6 percent. the breadth of the software portfolio, the strong recurring revenue stream and the actions taken to improve efficiency and productivity combined to deliver strong profit results.

29

systems and technology

($ in millions)

							Yr.-to-Yr.
					Yr.-to-Yr.		change adjusted
For the year ended December 31:	2009		2008		Change		for Currency
systems and technology external revenue:	$	16,190	$	19,287	(16.1	)%	(14.9	)%
system z					(28.7	)%	(27.5	)%
converged System p					(10.7	)	(9.2	)
system x					(4.6	)	(3.3	)
system Storage					(12.0	)	(11.0	)
retail Store Solutions					(25.6	)	(23.6	)
total Systems					(15.9	)	(14.6	)
Microelectronics oeM					(15.1	)	(15.2	)

Systems and Technology revenue decreased 16.1 percent (15 percent adjusted for currency) in 2009 versus 2008 reflecting the challenges that transactional-based businesses are facing in the current environment. While revenue performance declined in 2009, the rate of decline improved sequentially in the third and fourth quarters. The company gained share in System p, System x, blades, and in System Storage external disk and tape storage during 2009. 

system z revenue decreased 28.7 percent (28 percent adjusted for currency) in 2009 versus 2008. MIps (millions of instructions per second) shipments decreased 13 percent in 2009 versus the prior year. MIps increased 4 percent in 2009 on a two year compounded growth rate and this performance is consistent with what the company would expect at this point in the product cycle. In the third quarter, the company introduced System z offerings called System z Solution Editions, which expanded the platform’s value proposition to both new and existing clients. In 2010 the company will be releasing the next generation System z mainframe product. 

converged System p revenue decreased 10.7 percent (9 percent adjusted for currency) in 2009 versus 2008. low-end server revenue declined 43 percent, midrange server revenue decreased 2 percent and high-end server revenue decreased 10 percent versus 2008. although revenue declined, the company continued to gain market share in the midrange and high end of the product line by helping clients increase efficiency in their data centers by leveraging consolidation and virtualization results. this has led to seven consecutive quarters of share gains. In addition, in 2009, the company increased sales generated by unIX competitive displacements to over $600 million. In February 2010, the company introduced several new models of the next generation poWer systems, which will deliver 2 to 3 times the performance, within the same energy envelope.

system x revenue decreased 4.6 percent (3 percent adjusted for currency) in 2009 versus 2008. revenue performance in the second half of the year was strong with third quarter revenue increasing 0.6 percent (2 percent adjusted for currency) and fourth quarter revenue increasing 36.8 percent (30 percent adjusted for currency) compared to the prior year periods. system x server revenue declined 4 percent, primarily driven by decreased low-end server revenue (10 percent) in 2009 versus 2008. Blades revenue increased 11 percent in 2009 versus 2008. system x server has gained share in four consecutive quarters. the company’s improved sales model and enhanced product offerings were the key contributors to this performance. 

system Storage revenue decreased 12.0 percent (11 percent adjusted for currency) in 2009 versus 2008. total disk revenue decreased 9 percent versus 2008. these decreases were driven by declines in midrange disk revenue of 18 percent and decreased Enterprise Disk revenue of 6 percent. In the fourth quarter, the company introduced the ds8700 product, the latest addition to the ds8000 line of high-end disk systems. the company’s storage acquisitions, XIV and Diligent, had strong performance. XIV has added over 400 new customers since the acquisition. tape revenue declined 20 percent in 2009 versus 2008.

retail Stores Solutions revenue decreased 25.6 percent (24 percent adjusted for currency) in 2009 versus 2008, reflecting continued weakness in the retail sector.

Microelectronics oeM revenue decreased 15.1 percent (15 percent adjusted for currency), in 2009 versus 2008. although 2009 revenue declined, second half revenue improved significantly over first half performance with performance essentially flat compared to the prior year. the company’s 45 nanometer technology is in production and on track to drive the launch of the poWer7 systems in 2010.

30

($ in millions)

							Yr.-to-Yr.
For the year ended December 31:	2009			2008			Change
systems and Technology:
external gross profit	$	6,127		$	7,341		(16.5	)%
external gross profit margin	37.8		%	38.1		%	(0.2	)pts.
pre-tax income	$	1,419		$	1,550		(8.5	)%
pre-tax margin	8.3		%	7.7		%	0.6	pts.

the decrease in external gross profit for 2009 versus 2008 was primarily driven by lower revenue. 

overall, gross margin decreased 0.2 points versus the prior year. Margin improvements in system x, converged System p and System z were offset by impacts due to product mix and a margin decline in Microelectronics.

systems and Technology’s pre-tax income decreased 8.5 percent in 2009 when compared to 2008 driven by lower revenue. pre-tax margin increased 0.6 points in 2009 versus the prior year, reflecting the focus on cost and expense management and improving productivity.

GLOBAL FINANCING

See page 57 for an analysis of Global Financing’s segment results.

Geographic Revenue

In addition to the revenue presentation by reportable segment, the company also measures revenue performance on a geographic basis. the following geographic, regional and country-specific revenue performance excludes oeM revenue, which is discussed separately below.

($ in millions)

							Yr.-to-Yr.
					Yr.-to-Yr.		Change Adjusted
For the year ended December 31:	2009		2008		Change		for Currency
total revenue:	$	95,758	$	103,630	(7.6	)%	(5.3	)%
Geographies:	$	93,477	$	100,939	(7.4	)%	(5.1	)%
americas	40,184		42,807		(6.1	)	(5.1	)
europe/Middle east/africa	32,583		37,020		(12.0	)	(5.7	)
asia Pacific	20,710		21,111		(1.9	)	(3.7	)
Major markets					(8.2	)%	(6.4	)%
Growth markets					(3.5	)%	1.2	%
BrIc countries					0.7	%	4.3	%

Geographic revenue decreased 7.4 percent (5 percent adjusted for currency) to $93,477 million in 2009 when compared to 2008, with relatively consistent performance, adjusted for currency, across the geographies. revenue from the growth markets decreased 3.5 percent (increased 1 percent adjusted for currency) and revenue from the major markets decreased 8.2 percent (6 percent adjusted for currency). While the economic environment slowed globally in 2009, revenue growth, adjusted for currency, in the growth markets remained approximately 8 points higher than the major markets. the company has been investing to capture the opportunity in the emerging markets as these countries build out their public and private infrastructures. the growth markets contributed 19 percent of the geographic revenue in 2009, 1 point higher versus 2008. Within the BrIc countries, revenue increased 0.7 percent (4 percent adjusted for currency) led by growth in China, India and Brazil, adjusted for currency.

americas revenue decreased 6.1 percent (5 percent adjusted for currency) in 2009. Within the major market countries, the u.s. declined 6.5 percent and canada decreased 7.1 percent (1 percent adjusted for currency). revenue in the latin america growth markets decreased 3.4 percent (increased 1 percent adjusted for currency) led by growth in Brazil (increased 3 percent adjusted for currency). 

europe/Middle east/africa (eMea) revenue decreased 12.0 percent (6 percent adjusted for currency) in 2009 when compared to 2008. revenue decreased in the major market countries with year-to-year declines in the u.K. of 13.6 percent (increased 1 percent adjusted for currency), Germany 10.3 percent (6 percent adjusted for currency), France 11.6 percent (7 percent adjusted for currency), Italy 11.3 percent (7 percent adjusted for currency) and spain 12.6 percent (8 percent adjusted for currency).

31

asia Pacific revenue decreased 1.9 percent (4 percent adjusted for currency) year over year. revenue in the asia Pacific growth markets decreased 2.4 percent (increased 3 percent adjusted for currency), led by growth in China and India. china revenue increased 10 percent, adjusted for currency, as the company leveraged its broad portfolio to provide comprehensive solutions to clients. India revenue increased 6 percent, adjusted for currency. Japan revenue decreased 1.4 percent (10 percent adjusted for currency).

the company continues to see growing opportunity globally—much of which is outside the traditional IT opportunity—to help its clients drive efficiency in their physical infrastructures. 

oeM revenue of $2,281 million in 2009 declined 15.2 percent (15 percent adjusted for currency) compared to 2008 driven by reduced demand year over year in the technology oeM business. Year-to-year revenue performance improved in this business across the second half of 2009.

total Expense and Other Income

($ in millions)

							Yr.-to-Yr.
For the year ended December 31:	2009			2008			Change
total expense and other income	$	25,647		$	28,945		(11.4	)%
expense to Revenue	26.8		%	27.9		%	(1.1	)pts.

the key drivers year to year in total expense and other income were approximately:

·operational expense, (9) points

·currency, (4) points

·acquisitions, 1 point

In 2009, the company continued to execute its operational plan to increase process efficiency and productivity; leveraging the company’s scale and global presence. the company’s efforts have been focused on all areas of the business—from sales efficiency, supply chain management and service delivery to the global support functions. the company’s cost and expense base (approximately $80 billion) provides ample opportunity for savings and the company yielded approximately $3.7 billion in cost and expense savings in 2009. the company’s initiatives have contributed to an improved operational balance point and the improvements in margins and profit. as a result, the company is able to continue to invest in capabilities that will differentiate the company in the future and accelerate the development of new market opportunities.

For additional information regarding total expense and other income, see the following analyses by category.

sellIng, geneRAl AnD ADMInIstRAtIVe

($ in millions)

					Yr.-to-Yr.
For the year ended December 31:	2009		2008*		Change
selling, general andadministrative—base	$	18,056	$	19,967	(9.6	)%
advertising and promotional expense	1,252		1,259		(0.6	)
Workforce reductions	474		737		(35.7	)
amortization expense—acquired intangibles	285		306		(6.9	)
retirement-related expense	322		326		(1.2	)
stock-based compensation	417		484		(13.9	)
Bad debt expense	147		306		(52.0	)
total	$	20,952	$	23,386	(10.4	)%

* reclassified to conform with 2009 presentation.

total Selling, general and administrative (sG&a) expense decreased 10.4 percent (8 percent adjusted for currency) in 2009 versus 2008. overall, the decrease was driven by reductions in operational expense (down 9 points) as the company continues to focus on disciplined expense management, while investing for future growth. currency impacts also drove a year-to-year decline (down 3 points), partially offset by acquisition-related spending (up 1 point). Workforce reductions expense decreased $264 million, primarily due to actions taken in the fourth quarter of 2008, reflecting workforce actions in Japan ($120 million) and other ongoing skills rebalancing that is a regular element of the company’s business model. Bad debt expense decreased $159 million primarily driven by reductions in specific reserve requirements and lower accounts receivable balances in 2009 versus 2008. the company’s accounts receivable provision coverage is 2.0 percent, flat from a year ago.

OTHER (INCOME) AND EXPENSE

($ in millions)

							Yr.-to-Yr.
For the year ended December 31:	2009			2008*			Change
Foreign currency transaction(gains)/losses	$	(1	)	$	328		NM
Gains on derivative instruments	(12		)	(26		)	(53.4	)%
Interest income	(94		)	(343		)	(72.6	)
Net losses/(gains) from securitiesand investment assets	112			(52		)	NM
Net realized gains from certainreal estate activities	(5		)	(26		)	(82.6	)
Other	(352		)	(179		)	96.8
Total	$	(351	)	$	(298	)	17.7	%

*  Reclassified to conform with 2009 presentation.

nM—Not meaningful

32

Other (income) and expense was income of $351 million in 2009, an increase in income of $53 million year to year. The increase was driven by several key factors: the $298 million gain, reflected in Other, from the core logistics operations divestiture; increased foreign currency transaction gains of $329 million; offset by less interest income of $249 million due to lower rates; less gains from securities transactions of $162 million due to Lenovo equity sales in 2008; and a 2009 loss provision related to a joint venture investment of $119 million, also reflected in Other.

ReseARcH, DeVelopMent AnD engIneeRIng

($ in millions)

					Yr.-to-Yr.
For the year ended December 31:	2009		2008		Change
research, developmentand engineering
total	$	5,820	$	6,337	(8.2	)%

the company continues to invest in research and development, focusing its investments on high-value, high-growth opportunities. total Research, development and engineering (rd&e) expense decreased 8.2 percent in 2009 versus 2008; adjusted for currency, expense decreased 6 percent in 2009. the decrease in spending, adjusted for currency, was driven by continued process efficiencies and reductions in discretionary spending, partially offset by the impact of acquisitions. rd&e investments represented 6.1 percent of total revenue in 2009, flat compared to 2008.

IntellectuAl pRopeRty AnD custoM DeVelopMent IncoMe

($ in millions)

					Yr.-to-Yr.
For the year ended December 31:	2009		2008		Change
sales and other transfersof intellectual property	$	228	$	138	65.5	%
licensing/royalty-based fees	370		514		(28.0	)
custom development income	579		501		15.5
total	$	1,177	$	1,153	2.1	%

the timing and amount of sales and other transfers of Ip may vary significantly from period to period depending upon timing of divestitures, industry consolidation, economic conditions and the timing of new patents and know-how development. there were no significant individual Ip transactions in 2009 or 2008.

InteRest expense

($ in millions)

					Yr.-to-Yr.
For the year ended December 31:	2009		2008		Change
Interest expense
total	$	402	$	673	(40.3	)%

the decrease in interest expense was primarily due to lower debt balances in 2009 versus 2008. total debt at december 31, 2009 was $26.1 billion; a decline of $7.8 billion of primarily non-Global Financing debt. Interest expense is presented in cost of financing in the Consolidated Statement of Earnings if the related external borrowings are to support the Global Financing external business. overall interest expense for 2009 was $1,109 million, a decrease of $353 million versus 2008.

stock-Based compensation

total pre-tax stock-based compensation cost of $558 million decreased $101 million compared to 2008. the decrease was principally the result of a reduction in the level of stock option grants ($159 million), offset by an increase related to restricted and performance-based share units ($58 million). the year-to-year change was reflected in the following categories: reductions in cost ($22 million), rd&e expense ($12 million), and sG&a expense ($67 million).

see note T, “Stock-Based Compensation,” on pages 105 to 109 for additional information on stock-based incentive awards.

Retirement-Related Benefits

the following table presents the total pre-tax cost for all retirement-related plans. these amounts are included in the Consolidated Statement of Earnings within the category (e.g., cost, sG&a, rd&e) relating to the job function of the plan participants.

($ in millions)

					Yr.-to-Yr.
For the year ended December 31:	2009		2008*		Change
defined benefit and contributionpension plans cost	$	1,065	$	1,076	(1.1	)%
nonpension postretirement plans costs	350		363		(3.6	)
total	$	1,415	$	1,439	(1.7	)%

* reclassified to conform with 2009 presentation.

33

overall retirement-related benefit costs decreased $24 million versus 2008. total plan costs decreased $142 million year-to-year, driven by lower defined contribution plans cost of $160 million compared to 2008. this decrease was offset by higher costs for mandatory pension insolvency insurance coverage. during the year ended december 31, 2009, the company paid $140 million for mandatory pension insolvency insurance coverage in certain non-u.s. countries, an increase year to year of $117 million driven primarily by premiums paid in Germany. While not related to the IBM Plans, all companies with plans in Germany and several other countries are subject to these charges.

retirement-related plan costs decreased approximately $16 million in cost, $4 million in SG&A expense and $3 million in rd&e expense.

see note U, “Retirement-Related Benefits,” on pages 109 through 121 for additional information on these plans and the factors driving the year-to-year change in total cost.

Acquired Intangible Asset Amortization

the company has been investing in targeted acquisitions to increase its capabilities in higher value businesses. the following table presents the total acquired intangible asset amortization included in the Consolidated Statement of Earnings. see note J, “Intangible Assets Including Goodwill,” on pages 89 and 90 for additional information.

($ in millions)

For the year ended December 31:	2009		2008		Yr.-to-Yr. Change
cost:
software (Sales)	$	160	$	173	(7.5	)%
Global Technology Services (Services)	33		32		2.2
systems and Technology (Sales)	11		8		27.0
selling, general andadministrative expense	285		306		(6.9	)
total	$	489	$	520	(6.0	)%

Income Taxes

the effective tax rate for 2009 was 26.0 percent, compared with 26.2 percent in 2008. The 0.2 point decrease was primarily driven by a more favorable geographic mix of pre-tax income, the absence of the 2008 tax cost impacts associated with the intercompany transfer of certain intellectual property and the agreements reached regarding the completion of the u.s. federal income tax examination for the years 2004 and 2005, including the associated income tax reserve redeterminations. these benefits were offset by a decrease in 2009 in the utilization of foreign tax credits.

earnings Per Share

Basic earnings per share is computed on the basis of the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed on the basis of the weighted-average number of shares of common stock outstanding plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method. dilutive potential common shares include outstanding stock options, share awards and convertible notes.

For the year ended December 31:	2009		2008			Yr.-to-Yr. Change
earnings per share of common stock:
Assuming dilution	$	10.01	$	8.89	*	12.6	%
Basic	$	10.12	$	9.02	*	12.2	%
Weighted-average sharesoutstanding (in millions):
Assuming dilution	1,341.4		1,387.8		*	(3.3	)%
Basic	1,327.2		1,369.4		*	(3.1	)%

*reflects the adoption of the FASB guidance in determining whether instruments granted in share-based payment transactions are participating securities. see note B, “Accounting Changes,” on pages 79 to 82 for additional information.

Actual shares outstanding at december 31, 2009 and december 31, 2008 were 1,305.3 million and 1,339.1 million, respectively. the average number of common shares outstanding assuming dilution was 46.4 million shares lower in 2009 versus 2008. the decrease was primarily the result of the common stock repurchase program. see note N, “Equity Activity,” on pages 98 and 99 for additional information regarding common stock activities. also see note R, “Earnings Per Share of Common Stock,” on page 104.

Financial Position

Dynamics

At December 31, 2009, the company’s balance sheet and liquidity position remain strong. Cash on hand at year end was $12,183 million. Total debt of $26,099 million decreased $7,826 million from prior year-end levels, primarily as a result of the repayment of debt issued in support of the 2007 accelerated share repurchase program. The commercial paper balance at December 31, 2009 was $235 million, down $233 million from December 31, 2008. In 2009, the company generated $20,773 million in cash from operations, an increase of $1,961 million compared to 2008. The company has consistently generated strong cash flow from operations and continues to have access to additional sources of liquidity through the capital markets and its $10 billion global credit facility.

34

Consistent with accounting standards, the company remeasures the funded status of its retirement and postretirement plans at December 31. The funded status is measured as the difference between the fair value of the plan assets and the benefit obligation and is recognized in the Consolidated Statement of Financial Position. At December 31, 2009, primarily as a result of improved returns on plan assets, the overall net underfunded position decreased $4,667 million from December 31, 2008, to a net underfunded position of $13,818 million. This change is primarily reflected in prepaid pension assets and retirement and nonpension postretirement benefit obligations which increased $1,401 million and decreased $3,500 million, respectively, from year-end 2008 levels. Due to the improvement in the equity markets in 2009, the return on the U.S. Personal Pension Plan assets was 11 percent, compared to a negative 15 percent in 2008. The company’s asset return in the non-U.S. plans was approximately 14 percent compared to a negative 21 percent in 2008. At December 31, 2009, the company’s qualified defined benefit plans worldwide were 99 percent funded with the U.S. qualified Personal Pension Plan 101 percent funded.

In addition, total equity increased $9,170 million, net of tax, primarily as a result of an improvement in retained earnings of $10,546 million driven by current year net income, partially offset by net stock transactions which declined $4,390 million primarily due to common stock repurchases.

The assets and debt associated with the Global Financing business are a significant part of the company’s financial position. The financial position amounts appearing on page 65 are the consolidated amounts including Global Financing. Theamounts appearing in the separate Global Financing section on pages 57 through 61 are supplementary data presented to facilitate an understanding of the Global Financing business.

Working Capital

($ in millions)

At December 31:	2009		2008
current assets	$	48,935	$	49,004
current liabilities	36,002		42,435
Working capital	$	12,933	$	6,568
current ratio	1.36		1.15

Working capital increased $6,365 million compared to the prior year primarily as a result of a net decrease in current liabilities. The key drivers are described below:

Current assets decreased $68 million due to:

·an increase of $1,066 million in cash and cash equivalents and marketable securities (see Cash Flow analysis below and on page 36); partially offset by;

·a decrease of $1,541 million in short-term receivables, offset by a currency benefit of $779 million, driven by short-term financing receivables due to lower volumes;

·a decrease of $353 million in prepaid expenses and other current assets primarily resulting from:

·a decrease of $500 million in derivative assets as a result of changes in foreign currency rates primarily driven by instruments in cash flow hedging relationships; partially offset by;

·an increase of approximately $236 million in services pre-paid and deferred transition costs; and

·acurrency benefit of $135 million.

Current liabilities decreased $6,433 million as a result of:

·a decrease in short-term debt of $7,068 million primarily driven by:

·$12,123 million in payments; partially offset by;

·reclasses of $2,282 million from long-term to short-term debt to reflect maturity dates; and

·$3,502 million in new debt issuances.

·a decrease of $1,357 million in other accrued expenses and liabilities primarily due to:

·a decrease of $508 million in derivative liabilities as a resultof changes in foreign currency rates primarily for certain economic hedges;

·a decrease of $349 million in workforce reduction accruals; and

·a decrease of $218 million in deferred tax liabilities; partially offset by;

·an increase of $1,083 million in taxes payable as a result of a reclass from noncurrent liabilities related to uncertain taxbenefits and higher pre-tax income;

·an increase of $606 million in deferred income mainly driven by a currency impact of approximately $329 million; and

·an increase of $423 million in accounts payable including a currency impact of $131 million.

cash Flow

the company’s cash flow from operating, investing and financing activities, as reflected in the Consolidated Statement of Cash Flows on page 66, is summarized in the following table. These amounts include the cash flows associated with the Global Financing business.

35

($ in millions)

For the year ended December 31:	2009			2008
Net cash provided by/ (used in):
Operating activities	$	20,773		$	18,812
Investing activities	(6,729		)	(9,285		)
Financing activities	(14,700		)	(11,834		)
Effect of exchange rate changes on cash and cash equivalents	98			58
Net change in cash and cash equivalents	$	(558	)	$	(2,250	)

Net cash from operating activities for 2009 increased $1,961 million as compared to 2008 driven by the following key factors:

·An increase in cash provided by accounts receivable of $1,857 million, driven by Global Financing receivables due to lower volumes in 2009;

·Lower payments resulted in a benefit in accounts payable of $1,030 million year to year;

·Tax refunds of approximately $710 million; partially offset by:

·Higher retirement-related funding of $875 million;

·Derivative instruments in cash flow hedging relationships representing a use of cash of $247 million in the current year in comparison to a source of cash of $176 million in 2008; and

·Higher payments for workforce rebalancing actions of $377 million.

Net cash used in investing activities decreased $2,556 million on a year-to-year basis driven by:

·A decrease of $5,119 million in cash used for acquisitions primarily driven by the acquisition of Cognos in 2008;

·A decrease in cash used in net capital spending of $704 million driven by a decline in rental additions and lower investment requirements in the Strategic Outsourcing and Microelectronics businesses; and

·An increase in cash from divestitures of $329 million as a result of the Geodis transaction in 2009; partially offset by:

·The net impact of purchases and sales of marketable securities and other investments that resulted in a use of cash of $2,005 million in the current year in comparison to a source of cash in 2008 of $1,510 million.

Net cash used in financing activities increased $2,866 million compared to 2008 as a result of:

·An increase of $5,019 million in net cash payments used to retire debt;

·A decrease of $721 million in cash generated by other common stock transactions primarily due to lower stock option exercises; partially offset by:

·Lower common stock repurchases of $3,150 million.

Within total debt, on a net basis, the company utilized $7,463 million in net cash to retire debt versus $2,444 million in net cash used in 2008. The net cash used to retire debt in 2009 was comprised of: $13,495 million in cash payments to settle debt and net payments of $651 million in short-term borrowings, partially offset by $6,683 million of new debt issuances. See note K, “Borrowings,” on pages 90 to 92 for a listing of the company’s debt securities.

Noncurrent Assets and Liabilities

($ in millions)

At December 31:	2009		2008
Noncurrent assets	$	60,087	$	60,520
Long-term debt	$	21,932	$	22,689
Noncurrent liabilities (excluding debt)	$	28,334	$	30,815	*

*Reflects the adoption of the FASB guidance on noncontrolling interests in consolidated financial statements. See note B, “Accounting Changes,” on pages 79 to 82 for additional information.

The decrease in noncurrent assets of $433 million compared to the prior year-end balance was primarily driven by:

·A decrease of $3,075 million in deferred taxes primarily driven by pension related activity;

·A decrease of $904 million in long-term financing receivables, offset by a currency benefit of $365 million, driven by maturities exceeding originations; and

·A decrease of $365 million in intangible assets driven by amortization; partially offset by:

·An increase of $1,964 million in goodwill primarily driven by a currency impact of $1,035 million and the acquisition of SPSS; and

·An increase of $1,401 million in pension assets mainly driven by plan contributions and pension remeasurements.

Long-term debt decreased $758 million primarily due to reclasses to short-term debt as certain instruments approached maturity ($2,282 million); offset by new net debt issuances ($1,885 million).

Other noncurrent liabilities, excluding debt, decreased $2,481 million primarily driven by:

·A decrease of $3,500 million in retirement and nonpension postretirement benefit obligations primarily driven by pension remeasurements and plan contributions; partially offset by:

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·An increase in deferred income of $392 million including a currency impact of $117 million;

·An increase in executive compensation plan accruals of $300 million primarily due to improvement in market returns; and

·An increase of $200 million in deferred tax liabilities.

Debt

The company’s funding requirements are continually monitored and strategies are executed to manage the overall asset and liability profile.

($ in millions)

At December 31:	2009		2008
Total company debt	$	26,099	$	33,926
Total Global Financing segment debt:	$	22,383	$	24,360
Debt to support external clients	19,091		20,892
Debt to support internal clients	3,292		3,468

The Global Financing business provides funding predominantly for the company’s external client assets as well as for certain assets under contract by other IBM units. These assets, primarily for Global Services, generate long-term, stable revenue streams similar to the Global Financing asset portfolio. Based on their nature, these Global Services assets are leveraged consistent with the balance of the Global Financing asset base. The debt analysis above is further detailed in the Global Financing section on page 60.

Total debt decreased $7,826 million in 2009 versus 2008, primarily as a result of the repayment of debt issued in support of the 2007 accelerated share repurchase program.

Given the significant leverage, the company presents a debt-to-capitalization ratio which excludes Global Financing debt and equity as management believes this is more representative of the company’s core business operations. This ratio can vary from period to period as the company manages its global cash and debt positions.

“Core” debt-to-capitalization ratio (excluding Global Financing debt and equity) was 16.0 percent at December 31, 2009 compared to 48.7 percent at December 31, 2008. The reduction was primarily driven by the decrease in non-Global Financing debt of $5,849 million and growth in non-Global Financing equity of $9,493 million from December 31, 2008 balances.

Consolidated debt-to-capitalization ratio at December 31, 2009 was 53.4 percent versus 71.4 percent at December 31, 2008.

Equity

($ in millions)

At December 31:	2009		2008*
Equity
Total	$	22,755	$	13,584

*Reflects the adoption of the FASB guidance on noncontrolling interests in consolidated financial statements. See note B, “Accounting Changes,” on pages 79 to 82 for additional information.

Total equity increased $9,170 million in 2009 as a result of several key factors:

·An increase of $10,546 million in retained earnings primarily driven by net income of $13,425 million, partially offset by dividends ($2,860 million); and

·An increase of $3,015 million as a result of lower accumulated other comprehensive income/(loss), primarily from a positive impact from foreign currency translation adjustments of $1,732 million, in addition to pension remeasurements and other retirement-related activities of $1,727 million; partially offset by deferred losses from hedging programs in the current year of $481 million in comparison to deferred gains of $74 million in 2008; partially offset by:

·A decrease related to net stock transactions of $4,390 million, driven by less common stock repurchases in 2009 versus 2008.

Consolidated Fourth-Quarter Results

($ and shares in millions except per share amounts)

For the fourth quarter:	2009			2008			Yr.-to-Yr. Percent/ Margin Change
Revenue	$	27,230		$	27,006		0.8	%*
Gross profit margin	48.3		%	47.9		%	0.4	pts.
Total expense and other income	$	6,765		$	7,127		(5.1	)%
Total expense and otherincome-to-revenue ratio	24.8		%	26.4		%	(1.5	)pts.
Income before income taxes	$	6,381		$	5,808		9.9	%
Provision for income taxes	1,568			1,382			13.5	%
Net income	$	4,813		$	4,427		8.7	%
Net income margin	17.7		%	16.4		%	1.3	pts.
Earnings per share of common stock:
Assuming dilution	$	3.59		$	3.27	+	9.8	%
Weighted-average shares outstanding:
Assuming dilution	1,340.7			1,353.7		+	(1.0	)%

*(5.5) percent adjusted for currency.

+Reflects the adoption of the FASB guidance in determining whether instruments granted in share-based payment transactions are participating securities. See note B, “Accounting Changes,” on pages 79 to 82 for additional information.

37

The fourth quarter capped off a great year for the company in an uncertain economic environment with financial performance driven by continued margin expansion, profit growth and cash generation. Total revenue increased 0.8 percent as reported and decreased 5.5 percent, adjusted for currency, versus the fourth quarter of 2008. Systems and Technology year-to-year revenue growth improved sequentially in the quarter with share gains in System p, System x and Storage. Software had share gains in WebSphere, Tivoli and Key Branded Middleware. Global Services revenue adjusted for currency, was consistent with third-quarter performance while signings and backlog both increased year to year. Gross profit margin expanded 40 basis points primarily due to improved margins in services and systems as the company’s productivity initiatives continued to yield improvements in gross margin. The company has improved gross margin in 21 of the last 22 quarters. Total expense and other income decreased 5.1 percent driven by operational expense management. Pre-tax income increased 9.9 percent and pre-tax margin improved 1.9 points versus the fourth-quarter 2008. Pre-tax profit increased and margins expanded in every segment. Net income increased 8.7 percent and diluted earnings per share of $3.59 increased 9.8 percent year to year.

The Global Services segments combined had $14,630 million of revenue in the fourth quarter, an increase of 2.1 percent (decrease of 5 percent adjusted for currency) and delivered pre-tax profit of $2,322 million, an increase of 6.7 percent year to year. Total signings for Global Services in the fourth quarter were $18,763 million, an increase of 9.0 percent (2 percent adjusted for currency) versus 2008. Signings in the quarter included 22 deals larger than $100 million. Outsourcing signings of $11,385 million increased 15.0 percent (8 percent adjusted for currency). Consulting and Systems Integration and Integrated Technology Services signings increased 1.0 percent (decreased 6 percent adjusted for currency) to $7,378 million.

GTS revenue of $10,051 million increased 4.4 percent (decreased 3 percent adjusted for currency) versus the fourth quarter of 2008. GTS signings of $11,350 million increased 2.8 percent (decreased 4 percent adjusted for currency) with outsourcing signings increasing 4.7 percent (decreased 1 percent adjusted for currency), partially offset by a 2.9 percent decrease (10 percent adjusted for currency) in Integrated Technology Services signings. SO revenue increased 5.6 percent (decreased 2 percent adjusted for currency). SO signings decreased 9.9 percent (16 percent adjusted for currency). ITS revenue increased 0.2 percent (decreased 7 percent adjusted for currency). Revenue performance largely reflects signings performance which continued to be impacted by declines in OEM as the portfolio shifts to higher value offerings. ITS signings continued to be impacted by client deferrals and capital constraints. BTO revenue increased 7.0 percent (1 percent adjusted for currency) and signings increased 132.9 percent (124 percent adjusted for currency).

GTS gross profit margin improved 0.9 points to 35.8 percent with margin expansion in all lines of business. The GTS segment fourth-quarter pre-tax profit was up 8.3 percent and the pre-tax margin improved 60 basis points to 15.0 percent from fourth-quarter 2008.

GBS revenue of $4,579 million decreased 2.8 percent (9 percent adjusted for currency) compared to the fourth-quarter 2008. GBS signings of $7,413 million, increased 20.3 percent (13 percent adjusted for currency), driven by a 65.4 percent increase (55 percent adjusted for currency) in Application Outsourcing signings. Consulting and Systems Integration signings increased 3.4 percent (decreased 3 percent adjusted for currency) in the quarter, a significant improvement compared to third-quarter 2009. In the fourth quarter, small deal performance improved as the quarter progressed, general business and distribution sectors grew and the growth markets were up 34 percent, adjusted for currency.

GBS gross profit increased 2.9 percent in the quarter with the gross margin improving 1.7 points to 30.3 percent. The GBS segment pre-tax profit increased 3.5 percent in the fourth quarter and the pre-tax margin expanded 1.1 points to 16.0 percent, a record margin performance for the segment. Pre-tax margin was driven by strong utilization in the delivery centers, good subcontractor resource management and spending management.

Software revenue of $6,577 million increased 2.4 percent (decreased 4 percent adjusted for currency). Revenue performance highlighted continued strength in demand in the growth markets, strong contributions from recent acquisitions and an increase in the volume of small deal activity in North America. Key Branded Middleware increased 6.1 percent (flat adjusted for currency) and represented 63 percent of total software revenue, an increase of 2 points year to year. WebSphere Family revenue increased 12.9 percent (6 percent adjusted for currency) in the quarter. Business Process Management, Commerce and DataPower products all had double-digit revenue growth. ILOG performed well again this quarter and contributed to the overall WebSphere growth. Information Management increased 7.1 percent (1 percent adjusted for currency). Business Analytics continues to be a key growth area and Cognos posted strong double-digit revenue growth in the quarter. InfoSphere Warehouse, which helps customers turn information into a strategic asset, also grew double digits in the quarter. Tivoli software revenue increased 7.2 percent (1 percent adjusted for currency). Enterprise Asset Management, which is part of the Smarter Planet strategy, grew over 40 percent in the growth markets, adjusted for currency. Tivoli storage continued its strong growth as customers manage their rapidly growing storage data. Data Protection and Storage Management had double-digit revenue growth, with broad-based geography and sector growth. Rational revenue decreased 4.5 percent (10 percent adjusted for currency) and Lotus revenue decreased 5.3 percent (11 percent adjusted for currency).

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Software gross profit increased 2.4 percent with a flat margin year to year. The Software segment delivered pre-tax profit of $3,058 million, an increase of 9.6 percent. The pre-tax margin of 41.5 percent increased 2.4 points compared to fourth-quarter 2008.

Systems and Technology revenue of $5,190 million decreased 4.3 percent (9 percent adjusted for currency). The rate of year-to-year decline improved sequentially for the second consecutive quarter. System z revenue decreased 26.8 percent (31 percent adjusted for currency). System z MIPS shipments decreased 19 percent year to year. Volume performance was consistent with expectations for this point in the product cycle. Converged System p revenue declined 13.8 percent (18 percent adjusted for currency). Although revenue has declined, the brand has continued to gain market share, up 4 points in the quarter. In the fourth quarter, sales generated by UNIX competitive displacements was approximately $200 million. System x revenue increased 36.8 percent (30 percent adjusted for currency), with share gains in server (3 points) and blades (6 points). The improved sales model and enhanced product offerings were the key contributors to the fourth quarter performance. Systems Storage revenue increased 1.4 percent (decreased 4 percent adjusted for currency). Total disk revenue increased 6.1 percent (1 percent adjusted for currency) driven by strong growth in midrange and XIV. Tape revenue declined 9.8 percent (15 percent adjusted for currency) versus the fourth quarter of 2008. Microelectronics OEM revenue increased 1.9 percent in the fourth quarter. The company’s 300 millimeter fabrication facility is nearing full utilization and the 45 nanometer process output was sold out again this quarter.

Systems and Technology gross margin of 42.5 percent, increased 2.6 points versus the fourth quarter of 2008 with margin improvement in all brands. This was the highest gross profit margin since the fourth quarter of 2007 and was driven by improvements in System x server and converged System p. The Systems and Technology segment pre-tax profit increased 15.3 percent to $832 million. Pre-tax margin increased 2.6 points to 15.4 percent compared to the fourth quarter of 2008.

Global Financing external revenue of $621 million decreased 5.9 percent (12 percent adjusted for currency), driven by decreased financing revenue. The Global Financing segment delivered 2.0 points of external gross margin improvement and 5.5 points of total pre-tax margin expansion in the fourth quarter of 2009.

Geographic revenue increased 0.7 percent (decreased 6 percent adjusted for currency) with declines in all geographies, adjusted for currency. Revenue in the major markets decreased 2.2 percent (7 percent adjusted for currency) and was 1 point weaker than third quarter performance, adjusted for currency. The U.K. had solid growth and revenue performance improved sequentially in Canada and Japan (adjusted for currency). Revenue in the growth markets increased 14.3 percent (2 percent adjusted for currency), 9 points higher than the major markets, adjusted for currency. The growth markets contributed 20 percent of the geographic revenue in the fourth quarter. The BRIC countries were up 18.4 percent (7 percent adjusted for currency) driven by India, Brazil and China. Americas revenue was $11,106 million, a decrease of 3.0 percent (6 percent adjusted for currency). Adjusted for currency, revenue increased 2 percent in Latin America, while the U.S. declined 8 percent and Canada declined 1 percent. EMEA revenue increased 2.4 percent (decreased 7 percent adjusted for currency) to $9,694 million. In the major market countries, when adjusted for currency, revenue in Germany declined 8 percent, France declined 12 percent, Italy declined 11 percent and Spain declined 11 percent while the U.K. was up 4 percent. Asia Pacific revenue increased 5.7 percent (decreased 3 percent adjusted for currency) to $5,782 million, with the growth markets up 14.3 percent (3 percent adjusted for currency) and Japan down 2.8 percent (9 percent adjusted for currency).

Total expense and other income decreased 5.1 percent compared to the fourth quarter of 2008 and the expense-to-revenue-ratio improved 1.5 points. The decrease was driven by lower operational expenses (approximately 15 points), partially offset by 9 points due to the impact of currency and 1 point due to the impact of acquisitions. The company continues to execute its operational plan to increase efficiency and drive productivity by leveraging its scale and global presence. Initiatives such as globalization of support functions and services delivery and workforce balancing have yielded significant expense and cost savings. Within selling, general and administrative expense, workforce reduction charges decreased approximately $340 million in the fourth quarter.

The company’s effective tax rate in the fourth-quarter 2009 was 24.6 percent compared with 23.8 percent in the fourth quarter of 2008. The higher rate was primarily driven by higher utilization of tax credits in the prior year.

Share repurchases totaled $3,128 million in the fourth quarter. The weighted-average number of diluted common shares outstanding in the fourth quarter of 2009 was 1,340.7 million compared with 1,353.7 million in the fourth quarter of 2008.

The company ended the quarter with $12,183 million of cash and cash equivalents and generated $6,448 million in cash flow provided by operating activities driven primarily by net income. Net cash from investing activities was a use of cash of $2,495 million in fourth quarter of 2009 and Net cash from financing activities was a use of cash of $1,206 million.

39

Prior Year in Review

The Prior Year in Review section provides a summary of the company’s financial performance in 2008 as compared to 2007. For a detailed discussion of 2008 performance, see the 2008 Annual Report.

($ and shares in millions except per share amounts)

For the year ended December 31:	2008			2007			Yr.-to-Yr. Percent/ Margin Change
Revenue	$	103,630		$	98,786		4.9	%*
Gross profit margin	44.1		%	42.2		%	1.8	pts.
Total expense and other income	$	28,945		$	27,240		6.3	%
Total expense and other income-to-revenue ratio	27.9		%	27.6		%	0.4	pts.
Income from continuing operations before income taxes	$	16,715		$	14,489		15.4	%
Provision for income taxes	4,381			4,071			7.6	%
Income from continuing operations	$	12,334		$	10,418		18.4	%
Net income	$	12,334		$	10,418		18.4	%
Net income margin	11.9		%	10.5		%	1.4	pts.
Earnings per share of common stock:
Assuming dilution:
Continuing operations	$	8.89	+	$	7.15	+	24.3	%
Discontinued operations	—			(0.00		)	NM
Total	$	8.89	+	$	7.15+		24.3	%
Weighted-average shares outstanding:
Assuming dilution	1,387.8		+	1,456.9		+	(4.7	)%
Assets**	$	109,524		$	120,431		(9.1	)%
Liabilities**	$	95,939	++	$	91,816	++	4.5	%
Equity**	$	13,584	++	$	28,615	++	(52.5	)%

*2.3 percent adjusted for currency.

**At December 31.

+Reflects the adoption of the FASB guidance in determining whether instruments granted in share-based payment transactions are participating securities. See note B, “Accounting Changes,” on pages 79 to 82 for additional information.

++Reflects the adoption of the FASB guidance on noncontrolling interests in consolidated financial statements. See note B, “Accounting Changes,” on pages 79 to 82 for additional information

NM—Not meaningful

Continuing Operations

In 2008, the company performed extremely well in a difficult economic environment, delivering record levels of revenue, pre-tax profit, earnings per share and cash flow from operations. The financial performance reflected the continuing strength of the company’s global model and the results of the ongoing transformation of the business. The key elements of the company’s transformation include:

·A continuing shift to higher value businesses;

·Investing for growth in the emerging markets;

·Global integration;

·Investing in innovation; and

·Ongoing productivity resulting in higher profit margins.

Overall, the company capitalized on the opportunities in the global economies, generating approximately 65 percent of its revenue outside the U.S., in delivering full-year growth of 4.9 percent (2 percent adjusted for currency). Revenue increased in all geographies, both on an as reported basis and adjusted for currency– the revenue performance, adjusted for currency, was stable throughout the year as the company focused on solutions that meet clients’ needs. Revenue from the growth markets organization increased 9.8 percent (10 percent adjusted for currency). In these markets, where the growth was driven by the infrastructure build-out, the company invested aggressively to capture these opportunities. For the full year, growth in these markets, adjusted for currency, was 8 points greater than the major markets.

Gross profit margins improved, reflecting the shift to higher value businesses, pricing for value and the continued focus on productivity and cost management. Pre-tax income from continuing operations grew 15.4 percent and net income from continuing operations increased 18.4 percent reflecting an improvement in the tax rate. Diluted earnings per share improved 24.3 percent reflecting the strong growth in net income and the benefits of the common stock repurchase program. In 2008, the company repurchased approximately 90 million shares of its common stock.

The increase in 2008 revenue was primarily due to:

·Continued strong performance from Global Technology Services and Global Business Services with growth in all business lines and geographic units;

·Continued strong demand in the Software business, driven by Key Branded Middleware products, with strong contributions from strategic acquisitions; and

·Continued strength in the growth markets.

The increase in income from continuing operations before income taxes in 2008 was primarily due to the revenue growth and gross profit margin improvements in the Global Services and Software segments.

40

The following is an analysis of the 2008 versus 2007 reportable segment results for Global Services, Systems and Technology and Software. The Global Financing segment analysis is included in the Global Financing section on pages 57 through 61.

Global Services

($ in millions)

For the year ended December 31:	2008		2007		Yr.-to-Yr. Change		Yr.-to-Yr. Change Adjusted for Currency
Global Services external revenue:	$	58,891	$	54,144	8.8	%	5.6	%
Global Technology Services:	$	39,264	$	36,103	8.8	%	5.8	%
Strategic Outsourcing	20,183		18,701		7.9		4.7
Integrated Technology Services	9,283		8,438		10.0		7.5
Business Transformation Outsourcing	2,550		2,294		11.2		11.9
Maintenance	7,250		6,670		8.7		5.1
Global Business Services	$	19,628	$	18,041	8.8	%	5.2	%

Global Technology Services revenue increased 8.8 percent (6 percent adjusted for currency) in 2008 versus 2007 with strong performance across all lines of business. Total signings in GTS of $34,693 million increased 1 percent (flat adjusted for currency) led by Integrated Technology Services (ITS) signings growth of 5 percent (4 percent adjusted for currency). Outsourcing signings decreased 1 percent (2 percent adjusted for currency).

Strategic Outsourcing (SO) revenue was up 7.9 percent (5 percent adjusted for currency) with growth in all geographies, driven by prior year’s signings and continued growth in the base accounts. SO signings in 2008 increased 3 percent (1 percent adjusted for currency) when compared to 2007. Signings were very strong in the fourth quarter (up 20 percent), as clients focused on the value of the SO offerings in the current environment. The initiatives around standardization, global integration and improved efficiency are driving improvements in quality and customer satisfaction which are reflected in the signings performance and in improved profitability.

ITS revenue increased 10.0 percent (7 percent adjusted for currency) in 2008 versus 2007 led by growth in key infrastructure offerings such as Green Data Center and Converged Communications. ITS infrastructure offerings deliver high-value, standardized, asset-based services that leverage the company’s services, systems and software capabilities, providing clients end-to-end solutions and processes that transform their businesses.

Business Transformation Outsourcing (BTO) revenue increased 11.2 percent (12 percent adjusted for currency) with growth in all geographies, led by Asia Pacific. The Daksh business, which is focused on business process outsourcing, delivered strong growth. BTO signings decreased 18 percent (14 percent adjusted for currency) in 2008 compared to 2007.

Maintenance revenue increased 8.7 percent (5 percent adjusted for currency) with growth in availability services on both IBM and non-IBM IT equipment.

Global Business Services (GBS) revenue increased 8.8 percent (5 percent adjusted for currency) in 2008, with balanced growth across all three geographies. Revenue performance was led by growth in Application Management Services (12.5 percent) and Core Consulting (6.1 percent). Total signings of $22,488 million increased 2 percent (decreased 1 percent adjusted for currency), led by a 10 percent (6 percent adjusted for currency) growth in Consulting and Systems Integration signings. Growth was driven by offerings that enable clients to reduce cost and conserve capital. In the second half of the year, signings for transformational and compliance offerings also increased. Application Outsourcing signings decreased 14 percent (16 percent adjusted for currency) year over year.

41

($ in millions)

For the year ended December 31:	2008			2007			Yr.-to-Yr. Change
Global services:
Global Technology Services:
External gross profit	$	12,802		$	10,800		18.5	%
External gross profit margin	32.6		%	29.9		%	2.7	pts.
Pre-tax income	$	4,607		$	3,557		29.5	%
Pre-tax margin	11.3		%	9.4		%	1.9	pts.
Global Business Services:
External gross profit	$	5,238		$	4,240		23.5	%
External gross profit margin	26.7		%	23.5		%	3.2	pts.
Pre-tax income	$	2,681		$	2,064		29.9	%
Pre-tax margin	13.0		%	10.7		%	2.2	pts.

GTS gross profit increased 18.5 percent compared to 2007, with gross profit margin improving 2.7 points. All lines of business delivered gross margin expansion year over year driven by a combination of a mix to higher value offerings and an improved cost structure. Segment pre-tax profit increased 29.5 percent to $4,607 million with a pre-tax margin of 11.3 percent, an increase of 1.9 points versus 2007. At year-end 2008, GTS had delivered six consecutive quarters of double-digit pre-tax profit growth. The margin improvement was driven primarily by a delivery structure that maximizes utilization and flexibility, a mix to higher value offerings, lower retirement-related costs and improved productivity.

GBS gross profit increased 23.5 percent to $5,238 million in 2008 when compared to 2007, and the gross profit margin improved 3.2 points. Segment pre-tax profit increased 29.9 percent to $2,681 million with a pre-tax margin of 13.0 percent, an improvement of 2.2 points year over year. This was the third straight year of profit growth greater than 20 percent in GBS and demonstrates the results of a strong operating discipline and the benefits of a globally integrated operating model. The margin expansion was driven by improved utilization, cost and expense management, stable pricing and lower retirement-related costs.

At December 31, 2008, the estimated Global Services backlog at actual currency rates was $130 billion ($117 billion adjusted for currency), a decrease of $6 billion ($2 billion adjusted for currency) from prior year-end levels.

Software

($ in millions)

For the year ended December 31:	2008		2007		Yr.-to-Yr. Change		Yr.-to-Yr. Change Adjusted for Currency
Software external revenue:	$	22,089	$	19,982	10.5	%	8.1	%
Middleware	$	17,305	$	15,505	11.6	%	9.5	%
Key Branded Middleware	12,383		10,827		14.4		12.5
WebSphere Family					6.2		4.5
Information Management					24.5		22.0
Lotus